December 14th - 2009

REALTORS® and HST on collision course

Although organized real estate is still working to derail it, the HST train seems to be headed straight for us and unlikely to be knocked off track.

Although organized real estate is still working to derail it, the HST train seems to be headed straight for us and unlikely to be knocked off track. If the Harmonized Sales Tax takes effect in July 2010 as scheduled, it will impact the real estate industry. REALTORS® need to become familiar with how this tax will affect business.

HST is similar to the GST (Goods and Services Tax) in that it will apply a new tax to items that, in the past, would have been subject to only one of the GST or PST. Now these items will be charged both. The harmonized sales tax is a combination in Ontario of the Provincial Sales Tax (“PST” or “RST”) and the federal sales tax (“GST”). PST is currently being charged at eight percent and GST is being charged at five per cent. So, the new HST will be 13 per cent in total.

As far as real estate is concerned, the tax will apply to many previously tax-free services, including: home inspection fees, real estate commissions, legal fees, home appraisals, moving costs and mandatory home energy audits. OREA estimates HST will add almost $1500 in tax to the purchase of an existing home. However, there will be a provision for brokerages and businesses to claim a credit for any tax paid as a flow through.

What’s taxable?
A brand new residential home from the builder, never having been occupied, will be subject to HST. A substantially renovated used residential dwelling would also be charged this tax. As well, a used residential dwelling that had not been substantially renovated would have the potential for being subject to the tax if, for example, some renovations were done for purposes of using a portion of the dwelling for an office. If the person then claimed an input tax credit for the HST charged on the renovations, (at point of sale or conversion) that portion of the dwelling used for an office would then be subject to the HST. In this case, if the portion renovated comprised 10 per cent of the dwelling and the property sold for $400,000.00, then $40,000.00 would be subject to HST.

The implementation of the HST will also result in changes to OREA standard forms. For example, the residential resale Agreement of Purchase and Sale will provide a provision similar to: “HST: If this transaction is subject to Harmonized Sales Tax (H.S.T.), then such tax shall be ......................................... the Purchase Price. If this transaction is not subject to H.S.T., Seller agrees to certify on or before closing, that the transaction is not subject to H.S.T.” Other forms including The Listing Agreement, Buyer Representation Agreement, Buyer Customer Service Agreement, and Seller Customer Service Agreement have already been changed to read “plus applicable taxes” instead of “plus GST”.

Not all bad news
While it may be dreaded by most people, the HST is not all bad. For instance, in the past, if a salesperson, broker or brokerage had to pay GST on an item, the individual or brokerage could claim that GST paid on their return as a credit. However, you could not claim an Input Tax Credit (ITC) for the PST. The good news is that under the Harmonized Sales Tax regulations, you can claim the full HST amount on items purchased for the purpose of carrying on business.

The bad news is what was once not subject to Retail Sales Tax or PST will now be. For example, under the new regime, buying a house where the appliances are included will result in additional tax. Consequently, words like: “fridge, stove, washer, dryer” will have new implications and will attract the new higher tax. Homeowners will also have to pay an additional 8 per cent on many services required to maintain their homes. These services were previously exempt from PST and include utilities, home renovation labour, landscaping, snow removal and many others. OREA estimates HST on these services will add $480 in annual tax to the homeowner (based on a consumer that spends about $500 a month on these costs.)

Learn about the HST
As a REALTOR® you need to know as much as possible about the HST and how it impacts real estate. Should the HST become reality, you will need to take time at the outset of any professional relationship to discuss the additional expenses a consumer will incur in their real estate transaction. OREA’s continuing education course, Harmonized Sales Tax can help you to understand the HST and how it will impact your customers. For more information visit www.orea.com or to register, contact your local real estate board.

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ON THE MARKETS: New economy means new ways of doing business for REALTORS® Same agency rules apply for commercial, residential REALTORS®

For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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